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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended September 30, 2004
 
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission file number 0-22520

Terremark Worldwide, Inc.

(Exact Name of Registrant as Specified in Its Charter)
     
Delaware
   52-1981922
(State or Other Jurisdiction of
Incorporation or Organization)		   (IRS Employer
Identification No.)

2601 S. Bayshore Drive, Miami, Florida 33133

(Address of Principal Executive Offices, Including Zip Code)

Registrant’s telephone number, including area code:

(305) 856-3200

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.     Yes þ          No o

      The registrant had 351,437,399 shares of common stock, $0.001 par value, outstanding as of November 5, 2004.

Table of Contents

             
Page
   Financial Statements     2  
     Condensed Consolidated Balance Sheets as of September 30, 2004 and March 31, 2004 (unaudited)     2  
     Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2004 and 2003 (unaudited)     3  
     Condensed Consolidated Statement of Changes in Stockholder’s Equity (Deficit) for the Six Months Ended September 30, 2004 and 2003 (unaudited)     4  
     Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2004 and 2003 (unaudited)     5  
     Notes to Condensed Consolidated Financial Statements (unaudited)     6  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
   Quantitative and Qualitative Disclosures About Market Risk     31  
   Controls and Procedures     32  
 
 PART II — OTHER INFORMATION
   Unregistered Sales of Equity Securities and Use of Proceeds     33  
   Submission of Matters to a Vote of Security Holders     33  
   Other Information     34  
   Exhibits     35  
 Employment agreement dated October 18, 2004
 Fourth Amendment to Membership Interest Purchase Agreement
 Section 302 Certification of CEO
 Section 302 Certification of CFO
 Section 906 Certification of CEO
 Section 906 Certification of CEO

1

Table of Contents

PART I.     FINANCIAL INFORMATION

 
Item 1. Financial Statements

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

                   
September 30, March 31,
2004 2004
(Unaudited)
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 21,831,286     $ 4,378,614  
Accounts receivable, net of allowance for doubtful accounts of $200,000 at March and September
    2,207,564       3,214,101  
Note receivable
    —       2,285,000  
Contracts receivable
    112,151       363,043  
Prepaid and other current assets ($463,934 and $499,009 due from related party)
    751,720       1,115,230  
Deferred costs under government contracts
    3,592,328       —  
     
     
 
 
Total current assets
    28,495,049       11,355,988  
Investment in unconsolidated entities, net
    391,884       725,319  
Restricted cash
    794,018       789,476  
Property and equipment, net
    56,884,223       53,897,716  
Debt issuance costs and other assets
    10,392,631       664,334  
Goodwill
    9,999,870       9,999,870  
     
     
 
 
Total assets
   $ 106,957,675     $ 77,432,703  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
               
Current portion of notes payable (includes $4,325,010 due to related parties at March)
  $ 3,890,802     $ 9,194,145  
Construction payables
    2,954,530       1,363,554  
Accounts payable and accrued expenses
    7,865,135       7,067,319  
Current portion of capital lease obligations
    1,272,666       1,799,726  
Interest payable
    2,459,515       1,952,978  
Convertible debt
    —       250,000  
     
     
 
 
Total current liabilities
    18,442,648       21,627,722  
Convertible debt
    51,971,488       36,895,239  
Derivatives embedded within convertible debt, at estimated fair value
    21,804,000       —  
Notes payable, less current portion ($31,191,967 due to related parties)
    —       31,311,894  
Deferred rent
    9,716,260       6,938,454  
Capital lease obligations, less current portion
    102,335       105,886  
Deferred revenue
    3,225,056       2,686,396  
Series H redeemable convertible preferred stock: $.001 par value, 294 shares issued and outstanding, at liquidation value
    601,711       586,718  
     
     
 
 
Total liabilities
     105,863,498       100,152,309  
     
     
 
Minority interest
    142,885       —  
     
     
 
Commitments and contingencies
    —       —  
     
     
 
Stockholders’ equity (deficit):
Series G convertible preferred stock: $.001 par value, 20 shares issued and outstanding (liquidation value of approximately $2.9 million)
    1       1  
Series I convertible preferred stock: $.001 par value, 390 shares issued and outstanding (liquidation value of approximately $10.2 million and $10.0 million)
    1       1  
Common stock: $.001 par value, 500,000,000 shares authorized; 359,761,034 and 311,227,482 shares issued; 351,109,018 and 311,227,482 shares outstanding
    359,761       311,227  
Common stock warrants
    4,933,016       3,642,006  
Common stock options
    1,545,375       1,545,375  
Additional paid-in capital
    236,023,806       213,596,501  
Accumulated deficit
    (234,577,155 )     (236,814,717 )
Accumulated other comprehensive loss
    (112,876 )     —  
Treasury stock: 8,652,016 shares
    (7,220,637 )     —  
Note receivable — related party
    —       (5,000,000 )
     
     
 
 
Total stockholders’ equity (deficit)
     951,292       (22,719,606 )
     
     
 
 
Total liabilities and stockholders’ equity (deficit)
   $ 106,957,675     $ 77,432,703  
     
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                       
For the Six Months Ended For the Three Months Ended
September 30, September 30,
2004 2003 2004 2003
(Unaudited) (Unaudited)
Revenues
                               
 
Data center
  $ 15,025,915     $ 7,242,825     $ 7,914,744     $ 3,940,673  
 
Development, commission and construction fees
    —       41,081       —       —  
 
Management fees
    90,922       107,070       47,381       42,800  
 
Construction contracts
    996,786       98,972       255,987       65,277  
     
     
     
     
 
   
Operating revenues
    16,113,623       7,489,948       8,218,112       4,048,750  
     
     
     
     
 
Expenses
                               
 
Data center operations, excluding depreciation (includes $3,879,189 and $1,779,098 (six months) and $1,939,594 and $1,250,098 (three months) in rent expense with a related party
    12,200,670       6,506,485       6,463,989       3,949,937  
 
Construction contract expenses, excluding depreciation
    948,813       108,655       243,467       62,199  
 
General and administrative
    6,979,446       7,469,418       3,417,332       4,823,636  
 
Sales and marketing
    2,033,119       1,533,310       1,062,773       760,992  
 
Depreciation and amortization
    2,573,054       2,351,683       1,296,305       1,167,654  
     
     
     
     
 
   
Operating expenses
    24,735,102       17,969,551       12,483,866       10,764,418  
     
     
     
     
 
     
Loss from operations
    (8,621,479 )     (10,479,603 )     (4,265,754 )     (6,715,668 )
     
     
     
     
 
Other income (expenses)
                               
 
Change in estimated fair value of derivatives embedded within convertible debt
    13,679,250       —       10,375,875       —  
 
Gain on debt restructuring and extinguishment, net
    3,420,956       8,475,000       —       —  
 
Interest expense (includes $657,536 and $881,950 (six months) and $88,876 and $597,950 (three months) with a related party)
    (6,433,148 )     (6,225,547 )     (3,449,314 )     (4,385,979 )
 
Interest income
    196,243       55,729       129,924       32,474  
 
Other, net
    (4,260 )     296,832       23,406       261,768  
     
     
     
     
 
   
Total other income (expenses)
    10,859,041       2,602,014       7,079,891       (4,091,737 )
     
     
     
     
 
 
Income (loss) before income taxes
    2,237,562       (7,877,589 )     2,814,137       (10,807,405 )
Income taxes
    —       —       —       —  
     
     
     
     
 
Net income (loss)
    2,237,562       (7,877,589 )     2,814,137       (10,807,405 )
Preferred dividend
    (486,821 )     (80,000 )     (244,511 )     (40,000 )
     
     
     
     
 
Net income (loss) attributable to common shareholders
  $ 1,750,741     $ (7,957,589 )   $ 2,569,626     $ (10,847,405 )
     
     
     
     
 
Basic and diluted net income (loss) per common share
  $ 0.01     $ (0.03 )   $ 0.01     $ (0.04 )
     
     
     
     
 
Weighted average common shares outstanding
    336,054,804       299,303,427       350,660,029       308,617,668  
     
     
     
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES

IN STOCKHOLDERS’ EQUITY (DEFICIT)
                                                                         
Stockholders’ Equity (Deficit) (Unaudited)
Common Stock
Par Value
$.001
Accumu- Note
Common Common Additional Accumu- lated Other Receivable
Issued Stock Stock Paid-In lated Compre- Treasury Related
Shares Amount Warrants Options Capital Deficit hensive Loss Stock Party
Balance at March 31, 2004
    311,227,482     $ 311,227     $ 3,642,006     $ 1,545,375     $ 213,596,501     $ (236,814,717 )   $ —     $ —     $ (5,000,000 )
Conversion of debt
    55,249,274       55,249       —       —       27,980,775       —       —       —       —  
Conversion of preferred stock
    333,340       333       —       —       (333 )     —       —       —       —  
Exercise of stock options
    336,667       337       —       —       122,423       —       —       —       —  
Warrants issued
    —       —       1,552,650       —       —       —       —       —       —  
Exercise of warrants
    351,622       352       (261,640 )     —       263,288       —       —       —       —  
Preferred stock issuance costs
    —       —       —       —       (587,860 )     —       —       —       —  
Accrued dividends on preferred stock
    —       —       —       —       (406,821 )     —       —       —       —  
Stock tendered in payment of loan and retired
    (7,737,351 )     (7,737 )     —       —       (4,944,167 )     —       —       —       5,000,000  
Net assets acquired from NAP Madrid
    —       —       —       —               —       —       (7,220,637 )     —  
Foreign currency translation adjustment
    —       —       —       —       —       —       (112,876 )     —       —  
Net income
    —       —       —       —       —       2,237,562       —